Suspicion runs rampant with some insurance companies when it comes to alleged arson. Even if they cannot prove the policyholder had anything to do with a fire, some adjusters cannot help to look for other ways to deny an insurance claim. In Hayes vs. Metropolitan Property and Casualty Insurance Company,1 an insurer was held liable for bad faith denial of an insurance claim even though the policyholder did not win the breach of contract action because the policyholder failed to file his lawsuit within the one-year statute of limitations.

Since it is a misrepresentation in the application case, let’s start with the application facts:

Hayes’s home at 480 South 6 Street, Springfield, Nebraska, was insured…under a homeowner’s insurance policy. Hayes used the detached garage of the residence as part of a home base for his plumbing business, and in addition to living there himself with his children, he also rented out the second and third levels of the residence to a tenant and her two children.

When Hayes insured the residence in 2007, Met argues that he indicated on his application that the premises were not used to conduct business, and were not used as rental property. However, the application, a five-page document, was not a model of clarity on either of these two points. It was apparent that the form was not filled out by hand because pre-printed “x’s” were used in the checked boxes. Hayes testified that he did not recall personally completing the application in 2007; that he worked with an independent insurance agent when it was filled out, and it was also likely filled out with information from his sister, because his signature “stamp” was used in the signature line instead of his actual handwritten signature, and she had his authorization to use the stamp.

With regard to tenants, the form asked whether “the residence [was] held exclusively for rental?” and a pre- printed “x” was marked next to the letter “N” in answer to that question. The form also asked for number of “families” and the number “1” was printed in that box. With regard to the business, the form asked whether “[a]ny farming or other business [was] conducted on premises?” and again, a box indicating “no” was marked with a preprinted x. Hayes testified at trial that while he did maintain some plumbing supplies at the property, very little of the plumbing equipment was located in the detached garage due to limited space. He also testified that he definitely did not “run” the plumbing business out of the premises, although customers would on occasion contact him there about doing a plumbing job. Further, Hayes had a separate commercial business insurance policy to cover the plumbing business in the detached garage, (although the address for this business was inadvertently and incorrectly listed on the insurance form as 680 South 6 Street, Springfield, Nebraska, rather than 480), and Hayes testified that he believed the commercial policy adequately covered his business. Hayes did not make a claim with regard to the shop or business as a result of the fire.

(Emphasis added).

Of course, there was no problem with Metropolitan accepting the premiums for six years until a fire happened in January 2013. The insurance company kept rejecting the policyholder’s proofs of loss, made numerous requests for documents and information and took numerous examinations so that by the time the insurance company got around to deny the claim for a misrepresentation in the application, approximately 18 months had passed.

The problem for the policyholder was that he did not file his lawsuit until after the denial and long after the 12-month suit limitation under the policy. The problem for Metropolitan was that the judge who dismissed the contract action because it was late-filed also found that Metropolitan had no reasonable basis to deny the claim and found bad faith on the part of Metropolitan.

The Circuit Court of Appeals noted:

While Met is correct that there must have been a contract at some point in time in order for there to be a bad faith claim, Met cannot insulate itself from a bad faith claim by creating the fiction that a contract never existed by voiding or rescinding it “ab initio.” The cases Met cites do not stand for the proposition that an insurer can do what it did here–discover there is liability after eighteen months of “investigating” and rescind based upon misrepresentation evidence that was within its knowledge five days after the fire….

There are a number of lessons from this case. Insurance companies must investigate claims promptly. Second, when insurance companies deny claims, they must have a reasonable basis to do so, and a reasonable basis cannot be based on an ambiguous application with ambiguous answers which do not indicate an intent to deceive the insurance company.

Insurance Joke For The Day

What’s the difference between an actuary and an accountant?

An actuary looks at his shoes when he talks to you. An accountant looks at your shoes.
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1 Hayes v. Metropolitan Prop. & Cas. Ins. Co., No. 17-3005, 2018 WL 5852740 (8th Cir. (Neb.) Nov. 9, 2018).

  • Bill Wilson

    “The insurance company kept rejecting the policyholder’s proofs of loss, made numerous requests for documents and information and took numerous examinations so that by the time the insurance company got around to deny the claim for a misrepresentation in the application, approximately 18 months had passed.”

    From p. 265 of my “When Words Collide” book:

    Suit Against Insurer
    Many, if not most, insurance policies provide a 1-2-year limitation period for filing a lawsuit against the insurer. Normally this time frame runs from the date of loss, according to most policy provisions. However, there is some case law to support the position that the limitation period begins to run only at the time the insured is notified by the insurance company of its intent to deny coverage. Otherwise, as happened in two Tennessee cases, including Bush v. Exchange Mut. Ins. Co., 866 S.W.2d 575 (Tenn. Ct. App. 1993), the insurer could delay such notice for months, whether deliberately or unintentionally, compromising the insured’s ability to file suit within this conditional time frame.

    • Bill,

      It is always good to hear from such an expert. Thank you for this comment.

      You are correct. The time to file a lawsuit is often tolled during the investigation by the insurer in many states. Indeed, Arizona law says that insurance company’s unilateral provision to time bar suit and late proof of loss is inapplicable unless prejudice can be shown. These significant but very technical bars to payment are very harmful to policyholders and allow insurance companies to escape payment for otherwise valid claims.

  • shirley heflin

    Dear Chip:

    Wow! A one year statute of limitation in Nebraska? Seems ridiculous no matter what type of action one is filing, however, one involving an insurance company, certainly requires more time than that. In theory, the insurer can conduct their “investigation” (i.e., EUO’s, production of documents, etc.) within one year, but more often than not, this is not the case. I have to say this is the first time I’ve ever heard of an insured only having one year to file suit against their insured. In the end though, the Insured won bad faith damages and that’s always great!!

  • For a while there was a FL carrier that routinely “denied by rescission” on everyday claims, let alone major fires or other large losses. I bet it worked very well with insureds who were not represented. I’ve only had one insured so afraid of being accused of fraud that she withdrew her claim, which was valid.